5) Buffer Stocks - MB Flashcards
define a buffer stock…
a scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low
what is a commodity?
an unfinished product, eg wheat and oil
give examples of buffer stocks:
- International Cocoa Organisation
- Australian Wool
- US strategic petroleum reserve
- Thai rice
- EU CAP:
1) syrup stockpiles
2) butter mountains
3) wine lakes
why can prices be volatile in some commodity markets?
due to an unusually large shortage or surplus
what can shortages be caused by?
drought, disease, war or flooding
how can surpluses be caused?
by particularly favourable weather conditions
what do buffer stocks seek to do?
where produce can be stored for a long time, buffer stocks seek to stabilise prices over multiple years by buying in a glut year and selling in a shortage year
what are the two advantages of buffer stocks?
1) its a market based solution
2) may be self-funding
what are the two disadvantages of buffer stocks?
1) limited deployability
2) may be expensive
what do buffer stocks incentive producers to do? (market based solution)
incentivises producers to continue investment in production
how could buffer stocks be self-funding?
profits earned in shortage years can pay for produce bought in glut years and for the operational costs of the scheme
how do buffer stocks cause limited deployability?
deployment limited to commodities that can be stored for years
how can buffer stocks be expensive?
shortage years cannot be predicted so stores may end up being destroyed or dumped on markets in other countries instead of sold at a profit
what are the two reasons why a buffer stock compares favourably to a subsidy?
1) operating a buffer stock may be cheaper if its self- funding
2) as a market based solution, during years when prices fluctuate between PMAX and PMIN producers are disciplined by competition instead of becoming dependent on subsidies
what are the two reasons why a buffer stock compares unfavourably to a subsidy?
1) if the surplus is large, the cost of purchasing it may be unaffordable - costs are unpredictable
2) in a surplus year, the buffer stock increases prices to consumers instead of reducing them like a subsidy
Analysis of Diagram: why are supply curves perfectly inelastic?
As supply can only be increased in the long term
Analysis of Diagram: how is market failure caused
Market failure is caused by imperfect future information
Analysis of Diagram: how is market failure corrected when there is a shortage?
Market failure is caused by imperfect future information and is corrected, to some extent, by provision of goods from the buffer stock, increasing quantity consumed from Q2 to Q4; closer to the allocatively efficient level of consumption
Analysis of Diagram: what do buffer stocks allow if there is a shortage?
Because this Drives prices down it allows more consumers to derive Utility from the consumption of the good reducing the inequity caused by differences in wealth
What do the prices fluctuating between P1 and P2 show?
If there is no intervention, which will create uncertainty. A high level of uncertainty disincentives producers from investing in production, further exacerbating future supply and price volatility
What does the government do when price falls below P min?
A government buffer stock buys Q3 to Q1, increasing price from what otherwise would be P1and therefore the certainty for producers
What can happen to the stock if there is a shortage?
Sold at Q2 to Q4 wheb a shortage leads to the price rising above P Max perhaps earning P2
